Inflationary Pressures Cool, but the Fed Remains Divided
The mood was also lifted by easing inflation pressures following the US July PPI report, with the YY headline cooling to 4.7% from 5.5% in June, and the core print cooling from 4.7% to 4.2%. The OIS curve saw a modest dovish repricing, but 18 bps of tightening remain implied by year-end, and 40 bps are priced in by mid-2027 (nearly two rate hikes).
In recent Fed commentary, Cleveland Fed President Beth Hammack reiterated calls for immediate policy tightening to bring inflation back to target – note that Hammack was one of the three officials who dissented at the July meeting. However, Richmond Fed President Tom Barkin highlighted uncertainty about whether the Fed will need to raise the target rate, echoing the Fed’s mixed tone despite hawkish market pricing.
Heightened Middle East Tensions
Developments in the Middle East suggest that the US is resorting to economic pressure on Iran. US Treasury Secretary Scott Bessent told reporters overnight that Washington will roll out new economic measures against Iran next week. Frankly, it is difficult to predict what this means, as Iran is one of the most heavily sanctioned countries.
The deal between Oman and Iran to exert control over the Strait of Hormuz remains in its final stages. According to reports, Oman is ready to proceed; the delay may stem from leadership issues in Iran – who exactly gets to sign off on the deal? As you can see, we head into another weekend of uncertainty, with oil benchmarks remaining above US$80/barrel.
30-year Auction at the Highest Rate Since 2001
For bonds, US Treasury yields are higher across the curve this morning, with the main focus on the 30-year bond auction. The US Government auctioned 30-year bonds at the highest rate since 2001, with yields as high as 5.22%, second only to the 5.52% paid in August of that year. That is the scale of investor unease we are talking about: demand for compensation to fund US borrowing that we have not seen in a generation.
The 10-year auction on Wednesday told a similar – if slightly less dramatic – story, clearing at its highest yield since the 2007 financial crisis. Together, the two sales are being read as a warning shot about the growing US deficit, even though demand held up reasonably well on the day.
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